Claris Water Company makes and sells filters for water drinking fountains for the public. The filter sells for $50. Recently a make/buy analysis was done based on the need for new manufacturing equipment. The equipment first cost of $200,000 and $25,000 annual operation cost comprise the fixed cost, while Claris’s variable cost is $20 per filter. The equipment has a 5-year life, no salvage value, and the MARR is 6% per year. The deci­sion to make the filter was based on the breakeven point and the historical sales level of 5000 filters per year.

Question

(a) Determine the breakeven point.
(b) An engineer at Claris learned that an out­sourcing firm offered to make the filters for $30 each, but this offer was rejected by the president as entirely too expensive. Perform the breakeven analysis of the two options and determine if the “make” decision was correct.
(c) Develop and use the profit relations for both options to verify the preceding answers.
(d) Use a spreadsheet to verify the answers to parts (b) and (c) above by plotting the profit lines.

Answer 1

(a) Solve relation Revenue - Cost = 0 for Q = number of filters per year

50Q - [200,000(A/P,6%,5) + 25,000 + 20Q] = 0

30Q = 200,000(0.23740) +25,000

Q = 72,480/30

= 2416 filters per year



At 5000 units, make the filters in-house

(b) Solve the relation AWbuy = AWmake for Q = number of filters per year.



(50-30)Q = -72,480 + (50-20)Q

Q = 7248 filters per year

Since 5000 < 7248, to buy is the correct choice.



(c) Make: 5000 at $20 each.



Profit = 5000(50-20) – 72,480

= $77,520



Buy: 5000 at $30 each



Profit = 5000(50-30)

= $100,000



Profit is higher for buying



(d) The spreadsheet below verifies the answers above